Where will bond yields top out?

[UK]

https://www.bloomberg.com/news/articles/2022-10-20/treasury-yields-may-peak-before-end-of-the-year-gundlach-says

[tede02]

One year ago the 1-year Treasury was at <0.10%. Now it is moving towards 5% (around 4.7% today). Amazing. 

 

I follow Gundlach closely. He deserves the "bond king" title. As for rates, if long rates pop up another 100 bps, I expect we're going to see more turmoil like the UK pension situation. Who knows where it's going to come from. I was reading this morning that the Japanese yen is trading at the lowest level against the dollar in 25 years. Bank of Japan is intervening. It's just one thing after another. I've deployed some of my dry powder this year but I think the best deals may still be in front of us in all markets. 

[TwoCitiesCapital]

1 hour ago, tede02 said:

One year ago the 1-year Treasury was at <0.10%. Now it is moving towards 5% (around 4.7% today). Amazing. 

 

I follow Gundlach closely. He deserves the "bond king" title. As for rates, if long rates pop up another 100 bps, I expect we're going to see more turmoil like the UK pension situation. Who knows where it's going to come from. I was reading this morning that the Japanese yen is trading at the lowest level against the dollar in 25 years. Bank of Japan is intervening. It's just one thing after another. I've deployed some of my dry powder this year but I think the best deals may still be in front of us in all markets. 

 

The Fed is going to hike until they see inflation come down. Even though it seems pretty obvious it's already happening, with a lag, they're going to wait for the prints to prove it because the labor market gives them cover. 

 

But the trouble is both inflation and the labor market are lagging indicators. If the Fed hikes until they break, it means the Fed should've stopped hiking ~6 months before.

 

This is what I fear now - a Fed desperate to rebuild credibility and prevent inflation expectations become entrenched knowingly over-tightening to "prove a point". I'm coming around to this being pretty brutal. We already two quarters of negative GDP before the Fed even really got started - now that we're beginning to see the impacts of the first set of hikes, it's only going to get worse and they're still raising them. 

[tede02]

27 minutes ago, TwoCitiesCapital said:

This is what I fear now - a Fed desperate to rebuild credibility and prevent inflation expectations become entrenched knowingly over-tightening to "prove a point". I'm coming around to this being pretty brutal. We already two quarters of negative GDP before the Fed even really got started - now that we're beginning to see the impacts of the first set of hikes, it's only going to get worse and they're still raising them. 

 

I'm with you. I read Trillion Dollar Triage in recent months. One of my favorite parts of the book was the brief history of the Fed with a focus on each chairman. One thing that is made very clear is the Fed as an institution DOES NOT want a repeat of the 1970s. Basically every Fed chair since Arthur Burns has vowed not to make the same mistakes he made. Given that, I agree, the Fed probably will keep financial conditions tight until it is overwhelmingly clear that inflation is easing. And to your point, that will probably come after some significant pain is felt. 

 

One thing I keep thinking about is the likelihood that long rates go up significantly more than consensus. Presently, prominent fixed income investors like Gundlach seem to think a 10-year over 5% is VERY unlikely. But what if it does go to 6%, 7% or even higher? The headline inflation numbers in the UK this week were disturbing. What if inflation is stubborn in the US? I don't have any special insight but it seems like this type of scenario is reasonably possible. At the same time, growth is already showing signs of strain so perhaps the risk is coming down. I sure as hell would think we'll know sometime in Q1 if inflation is coming down. 

[Gregmal]

The largest components lag big time and that’s what they’re waiting on. Yes.
 

They should have just stuck with transitory because thats what it was, but people are antsy and need immediate action and it just doesn’t work that way. It took about 18 months to create the inflation via lockdowns and stimulus checks and it’ll take that long to have it resolve itself, rate hikes or not.
 

I mean how many times have we already seen folks continue to draw conclusions and be amazed at how “sticky” everything is because it’s been a whole month or two and there haven’t been major declines in the metrics lol? Time. That’s it. The way it’s calculated, it’s almost impossible to have it just fall off a cliff overnight. So if they’re reacting to that? Look out. 
 

CEOs everywhere are ringing the alarm bells. Even the ones not going crazy still say it’s just ok now but let’s not push it. Guys like Gundlach are already calling for deflation and pretty rapidly which again, if you look at how the CPI crap is measured, it’s almost inevitable starting late spring next year.  It would be quite remarkable to see them fully fuck up an economy they spent over a decade rebuilding, just cuz they got some academic theories in their head and couldn’t be patient…

Edited October 20, 2022 by Gregmal

[Spekulatius]

I think the Fed decided that the risk to overshoot on the rates and impact the economy in a real negative way (meaning significant increase in unemployment) is worth taking, compared to the risk not doing enough and then playing inflation ping pong for a decade.

 

I would tend to agree with them. The one caveat is that the financial system blows a gasket somewhere. It won't happen in the US, but it could happen elsewhere - the weak currencies (yen, Euro, GBP, virtually any EM currencies) are an indication of strain. My guess is that we could see defaults with EM's or maybe even within China, because they ride with the Fed due to their currency PEG.

[TwoCitiesCapital]

12 minutes ago, Spekulatius said:

I think the Fed decided that the risk to overshoot on the rates and impact the economy in a real negative way (meaning significant increase in unemployment) is worth taking, compared to the risk not doing enough and then playing inflation ping pong for a decade.

 

I would tend to agree with them. The one caveat is that the financial system blows a gasket somewhere. It won't happen in the US, but it could happen elsewhere - the weak currencies (yen, Euro, GBP, virtually any EM currencies) are an indication of strain. My guess is that we could see defaults with EM's or maybe even within China, because they ride with the Fed due to their currency PEG.

 

Unfortunately, I still think we play the ping pong. Monetary policy is now firmly entrenched with the executive branch who under both Republicans and Democrats has been 'spend baby spend'. 

 

The Fed can hike rates all they want - but if the government keeps printing trillions in response to each crisis, we're going to keep having these accelerations/decelerations every 3-4 years. 

[Gregmal]

There’s no better example of the stupidity and uselessness of cpi than this. What was cpi for say, June, July, august 2021? Cuz when I look for it, I’m being told 5% or so. And anyone living and breathing between spring 2020 and summer 2021 knows that is almost incomprehensible. Housing went up 30%. Pork doubled in price. Used cars went from being given away, to worth more than new cars. Oil too, $20 a barrel to $60. Hotels…$35 a night to $200. But yea, 5%….

[bookie71]

The last time we had inflation yields on bank cd's got to over 18%. It went through presidents of both parties and nothing seemed to work.

Hope that this time it isn't so bad, but trust me both parties can make it worse.

[Spekulatius]

Today will be another interesting day. As for unemployment - there is no signal yet that higher interest rates have affected the labor market.

https://www.cnbc.com/2022/11/02/adp-jobs-report-october-2022.html

 

The 7.7% rise in wages points to higher core inflation.

[Gregmal]

1 hour ago, Spekulatius said:

The 7.7% rise in wages points to higher core inflation.

So with this figure at least we can temporarily stop saying 6% loss of purchasing power? Until that pay increase translates to higher cost of plastic spoons at least. 

[Spekulatius]

2 hours ago, Gregmal said:

So with this figure at least we can temporarily stop saying 6% loss of purchasing power? Until that pay increase translates to higher cost of plastic spoons at least. 

Yes, the ~5% loss in income was about 6 month ago. Now we see salaries catching up with rising inflation.

 

That's exactly how an inflation spiral works unfortunately, unless the whole thing quickly peters out.

[Gregmal]

Ah, the wage price spiral theory with an academic cult like following and real world occurrence rate of like 1/20. Darn shame they don’t have futures options on plastic spoons. 

 

At least the most vulnerable will be ok for a while now. 

[tede02]

The 1-year Treasury is closing in on a 5-handle. Last year at this time it was <15 BPS. Amazing!

[Kupotea]

Anyone else think the top is in for yields? At least until we get the next round of aggressive QE...

[tede02]

I think it's quite possible on the long-end. Less certain on the short end. This is just conjecture from me but I think the market response today is overly optimistic. The Fed is gonna keep going until they get consecutive data suggesting things are slowing and they aren't going to pivot unless all hell breaks loose.